Climate change: the time to act is now 1

This is a pivotal moment as climate-aligned investment takes centre stage in company

pensions. As the government consults on measures embedding climate change into

pensions law, we take a look at what’s coming next for schemes.

Climate change: the time to act is now

RISK | PENSIONS | INVESTMENT | INSURANCE

Briefing

What’s coming (and what we reckon) Taking a look at the Department for Work and Pensions

(DWP) consultation published at the end of August 2020,

we can see what’s coming next for governance and

sustainability in UK pensions. Covid-19 and the UK lockdown

had enormous repercussions that will be felt across the

economy for years to come. But despite early optimism

around plummeting carbon emissions, the impact on our

climate has been minimal.

To build back better and greener in the long-term and

establish an economy that is more resilient, fairer and low

carbon, improving quality of life and rebuilding livelihoods,

climate change considerations need to be bedded into

pension scheme governance.

Under the new proposals, trustees will have

to understand and assess how their pension

scheme is contributing to climate change,

how exposed it is to climate risks, and make

decisions based on these considerations. They

will need to calculate the ‘carbon footprint’ of

their pension scheme.

Trustees must have effective governance,

strategy, risk management, and

accompanying metrics and targets for the

assessment and management of climate

risks and opportunities from October 2021,

and to report on these in line with the

Task Force on Climate-related Financial

Disclosures (TCFD’s) recommendations

by the end of 2022. They’ll need to assess

how the value of the schemes’ assets (and

liabilities) would be affected by different

temperature rise scenarios.

Mandatory reporting is proposed for

schemes over £5bn first of all. It will then be

extended a year later to >£1bn schemes and

authorised schemes like DC master trusts

(with a review in 2024 to look at extending

the requirements to other schemes and

avoid creating a cohort of members who

don’t benefit from the changes).

This will all be disclosed publicly, providing increased

transparency for members who previously might have been

in the dark about how their contributions were impacting

the planet.

We can expect civil society to take an interest too. Members

along with activist groups and charities may look to hold

trustees to account when they can see exactly how their

pension is being managed and how much it is contributing

to the rise in global temperature.

Given that defined contribution (DC) master trusts are

where smaller DC schemes go to consolidate, especially

where trustees struggle to meet increasing governance

requirements, there’s a good argument master trusts should

be doing this earlier rather than later. Certainly market

leaders in ESG are already adopting these ideas.

These coming requirements should improve

trustee investment governance, along with

the sustainability of pension schemes as the

UK seeks to meet its Paris Agreement targets.

Achieving Net Zero by 2050 is already law in the UK.

Right now is an opportunity for trustees to get a head

start managing the risks as well as taking advantage of

the opportunities stemming from climate change and the

transition to a low carbon economy, shifting capital and

changing behaviours.

This should have an impact on outcomes. Better informed

trustees can better manage exposure to climate change

risks, and be in a better position to take advantage of

investment opportunities that emerge during the transition

to a low carbon economy. And the proposals could also

increase engagement with pension savings.

Instead of being a theoretical pot or pension sometime in

the future, communications about the impact members’

money is having today can be more interesting. Campaigns

like ‘Make My Money Matter’ are gaining momentum and

more members will be asking how their money is building

the sort of world they want to retire into.

As for compliance, TPR will be overseeing

implementation, with penalties required

where no TCFD report is forthcoming and

discretion for the regulator to act in other

situations.

The consultation also discusses the

implied temperature rise metric, a way to

understand investments are contributing to

climate change and how portfolios might be

impacted by changes in policy. If a scheme’s

investments are tracking a 4 degree rise in

temperature when the UK government has

committed to less than 2 degrees, there

are probably going to be some impacts to

investments from the public policy response.

As this is a developing area, DWP will revisit

implied temperature rise and Paris Alignment

at a later date. (We are responding to the

consultation and will set out our views in

more detail in the coming weeks.)

As the UK moves to Net Zero, can your

portfolio perform under the changing

economic conditions that will result?

For more info, see our briefing note

on climate change and the actions

you can take here

Climate change: the time to act is now 2

Managing the transition to Net Zero Since the UK parliament declared a climate emergency in

May 2019 and became the first major economy in the world

to pass laws to end its contribution to global warming by

2050, it’s been clear major change is coming in the way

we look at climate change across the whole economy,

including for pension investments.

In the Green Finance Strategy, the government

set out plans to require reporting on climate

change beginning with the largest companies

and pension schemes. And now we have the

DWP’s policy proposals.

With powers in the Pension Schemes Bill currently going

through parliament, the proposals in the consultation spell

out where things are headed for trustees. While these

changes focus on the largest pension schemes, we can

clearly see the direction of travel for investment governance.

These proposals, with a focus on climate change and the

transition to a low carbon economy, build on existing

investment governance and risk management requirements

and practices while bedding in the TCFD recommendations

for pension schemes.

TCFD is a framework to help companies and

investors consistently measure, manage, and

report their climate-related risk exposures.

The recommendations are for everyone

to use in their financial reporting – public

and private companies, asset managers,

insurers and asset owners, including pension

schemes.

TCFD covers governance, risk and strategy,

all areas familiar to pension trustees, along

with scenario analysis and metrics. These

are the developing areas those running

schemes need to adopt to help them

manage the transition to a low carbon

economy, undertaking effective stewardship

through collaboration and engagement with

their investments.

With a range of potential climate scenarios

and highly complex impacts reaching

far into the future, few trustees will have

developed concrete plans to quantify

and address the risks of climate change

or capitalise on the opportunities of the

transition to Net Zero.

The process of carrying out TCFD reporting,

should lead to better-informed decision-

making on climate risks, while improved

transparency should improve accountability

and provide decision-useful information to

investors and ultimately, beneficiaries.

The process will help trustees

evaluate the way in which

climate-related risks and

opportunities may affect their

strategies, empowering them

to adapt and respond.

TCFD CORE ELEMENTS

Source: www.tcfdhub.org/recommendations/

Governance

Strategy

Risk Management

Metric and Targets

Climate change: the time to act is now 3

Governance

• Effective oversight of climate-related risks and

opportunities

• Describe the role of trustees and others assessing and

managing climate-related risks and opportunities

Strategy

• Identify and assess the impact of climate-related risks

and opportunities on investment (and funding for DB

schemes) over the short, medium and long-term

Risk

• Effective identification, management and integration of

climate-related risks

Scenario Analysis

• Assess resilience as far as trustees are able of assets,

liabilities and investment strategy (and funding for DB)

to climate-related risks in at least 2 climate-related

scenarios, including at least one scenario that represents

an eventual global average temperature rise of between

1.5 and 2°C on pre-industrial levels

• Annual disclosure of scenario analysis

Metrics

• Use a greenhouse gas emissions (GHG)

based metric and a non-emissions-

based metric to assess scheme assets,

applying this and calculating quarterly

Targets

• Set at least one target related to

the scheme’s metrics and measure

performance against the target quarterly

Annual disclosure

• Describing effective oversight and roles

• Describing risks, opportunities and

impacts over the short, medium and

long term

• Risk identification, management and

integration processes

• Metrics (explaining if trustees have only

been able to obtain partial or estimated

data, why their data does not cover the

whole portfolio)

• Scheme targets and performance

• Publish in annual report, on publicly

available website, communicate

to members in the annual benefit

statement and provide link to TPR in

annual scheme return.

>£5bn – Must have governance in place by October 2021 and

report by December 2022.

>£1bn and authorised schemes e.g. DC master trusts and

collective DC schemes must have governance in place by

October 2022 and report by December 2023

Other schemes will be phased in following a review in 2024.

Climate change: the time to act is now 4

What will trustees need to do?

September 2020

Please contact your Barnett Waddingham consultant if you would like to discuss any of the above topics in

more detail. Alternatively get in touch via the following:

Amanda LathamPolicy and Strategy Lead

Amanda.Latham@Barnett-Waddingham.co.uk

info@barnett-waddingham.co.uk 0333 11 11 222

www.barnett-waddingham.co.uk

Barnett Waddingham LLP is a body corporate with members to whom we refer as “partners”. A list of members can be inspected at the registered office. Barnett Waddingham LLP (OC307678), BW SIPP LLP (OC322417), and Barnett Waddingham Actuaries and Consultants Limited (06498431) are registered in England and Wales with their registered office at 2 London Wall Place, London, EC2Y 5AU. Barnett Waddingham LLP is authorised and regulated by the Financial Conduct Authority. BW SIPP LLP is authorised and regulated by the Financial Conduct Authority. Barnett Waddingham Actuaries and Consultants Limited is licensed by the Institute and Faculty of Actuaries in respect of a range of investment business activities.

Climate change: the time to act is now 5